7 Financial services: benchmarks
| Committee's assessment
| (a) Legally and politically important (b) Politically important
|
| Committee's decision | Not cleared from scrutiny; further information requested
|
| Document details | (a) Draft Regulation about benchmarks used in the financial services sector; (b) Opinion of the European Central Bank on document (a)
|
| Legal base | (a) Article 114 TFEU; co-decision; QMV (b) —
|
| Department | HM Treasury
|
| Document numbers | (a) (35328), 13985/13 + ADDs 1-2, COM(13) 641
(b) (36347), —
|
Summary and Committee's conclusions
7.1 The draft Regulation (document (a)), held under scrutiny since
October 2013, concerns indices used as benchmarks[23]
in financial instruments, financial contracts or to measure the
performance of investment funds. It seeks to improve governance
of the benchmark process, prevent conflict of interests of benchmark
administrators[24] and
contributors,[25] enhance
the quality and accuracy of input data and methodologies used
by administrators and ensure adequate protection for consumers
and investors using benchmarks.
7.2 The House of Commons is the only national parliament
to have issued a Reasoned Opinion on this proposal (in November
2013). This challenged the supposed benefits of EU level action
— the enhancement of the single market, the promotion of
cross-border transactions and the protection of consumers —
as being outweighed by potential disadvantages. Disbenefits included
the unsuitability of harmonised rules to a wide variety of specific
benchmarks, non-alignment with the International Organisation
of Securities Commissions (IOSCO) standards, increased regulatory
burdens on benchmark administrators and contributors, the risk
to the independence of national statistics authorities and the
lack of provision for third country benchmarks. The Commission
responded to the Reasoned Opinion, maintaining that the proposal
was justified. In January 2014, the ECB published an Opinion which
favoured the original proposal and its wide scope (the scrutiny
issues relating to the document's delayed deposit have been addressed
as indicated in our previous Report).
7.3 The Government reports on progress achieved since
its last update in November 2014 on the negotiation of document
(a). There continues to be movement towards a more proportionate
and relative approach to regulation of benchmarks, which is also
more aligned with IOSCO and therefore more favourable to the UK's
position.
7.4 We thank the Economic Secretary to the Treasury
(Andrea Leadsom) for this helpful update on the proposed Regulation.
We welcome the continued development of the proposal towards a
more proportionate treatment of benchmarks, better aligned with
IOSCO standards.
7.5 We expect the Minister to report to us before
any General Approach is agreed. When she does, we would:
i) welcome her comments on press reports that
the compromise text (a version of 9 September 2014) includes Institutions
for Occupational Retirement Provision (IORPS) under the definition
of "supervised entities" and therefore restricts their
use of benchmarks to those "which are robust" and "provided
by administrators that meet prescriptive requirements".[26]
We would be interested to learn whether the Government considers
this a prudent development for holders of pensions or an unwelcome
constraint on investment in pensions; and
ii) request that if the changes to the original
proposal (as reflected in the compromise text) continue apace
and are sufficiently significant, the Minister should consider,
for transparency reasons, depositing with us the proposed General
Approach text together with an Explanatory Memorandum.
7.6 Pending the Minister's next update, we retain
both documents under scrutiny.
Full details of
the documents: (a) Draft
Regulation on indices used as benchmarks in financial instruments
and financial contracts: (35328), 13985/13 + ADDs 1-2, COM(13)
641; (b) Opinion of the European Central Bank of 7 January 2014
on indices used as benchmarks in financial instruments and financial
contracts (CON/2014/2): (36347), —.
Background and previous scrutiny
7.7 The background to document (a), an account of
its provisions, the draft Reasoned Opinion and our assessment
of the Commission's response are set out in our Twentieth, Twenty-third,
Thirty-ninth and Forty-seventh Reports of 2013-14. The debate
on the Reasoned Opinion took place on 28 November 2013.[27]
An account of the ECB Opinion (document (b)) is provided in our
Fifteenth and Twenty-second Reports of 2014-15.[28]
Minister's letter of 16 December 2014
7.8 The Economic Secretary to the Treasury provides
the following update on progress in the negotiations of the Regulation.
She informs us first about the latest compromise text circulated
by the Italian Presidency on 1 December and the changes made which
she considers to be improvements:
"Firstly, it allows for a transitional
period in which significant discretion is given to national competent
authorities to decide whether benchmark administrators should
be authorised or registered by their regulator. Institutions who
are already supervised will also only have to register rather
than go through a full authorisation. This goes towards our objective
of ensuring regulators can focus their resources on bringing large
and economically important benchmark administrators under supervisory
focus.
"Furthermore, the proposal now contains
many appropriate delegations which will allow many of the requirements
to be suitability calibrated according to the specific characteristics
of benchmark administrators such as their size or the sector they
cover.
"It is also welcome that benchmarks based
on regulated data (such as data from trading venues) are now exempted
from some of the Regulation's requirements. This is appropriate
and proportionate since such regulated data is already subject
to strict regulatory requirements."
7.9 She then notes that further improvements could
be made in respect of the treatment of non-EU benchmarks. However,
she says that the Italian Presidency's alternative approach for
recognising non-EU administrators, based on other regimes in other
EU legislation is to be welcomed. She says that the new approach
"represents a sensible basis for a suitable regime".
However, the Government "will continue to take opportunities
as the negotiation progresses, including in trilogues, to secure
clarifications and improvements to ensure the regime will work
in practice". Judging this to be an important issue, the
Minister adds that ensuring a workable regime, based on IOSCO,
remains a "key objective".
7.10 She also recognises that further pressure needs
to be brought to bear "for national competent authorities
to have the final say on the authorisation and supervision of
benchmark administrators".
7.11 She ends her letter by saying that the Government
will continue to press for further improvements (without saying
what they are) before being able to agree a General Approach on
the proposal. However, she believes that "negotiations under
the Italian Presidency have brought us close to an acceptable
text".
Previous Committee Reports
(a) Twenty-second Report HC 219-xxi, (2014-15), chapter
8, (26 November 2014); Fifteenth Report HC 219-xv (2014-15), chapter
8 (22 October 2014); Forty-seventh Report HC 83-xlii (2013-14),
chapter 12 (30 April 2014); Twenty-third Report HC 83-xxi (2013-14),
chapter 5 (20 November 2013); Twentieth Report HC 83-xix (2013-14),
chapter 4 (30 October 2013): (35328), 13985/13; (b) Twenty-second
Report HC 219-xxi, (2014-15), chapter 8, (26 November 2014); Fifteenth
Report HC 219-xv (2014-15), chapter 8 (22 October 2014): (36347),
—.
23 Defined in the proposal as "any index by reference
to which the amount payable under a financial instrument or a
financial contract, or the value of a financial instrument is
determined or an index that is used to measure the performance
of an investment fund". Back
24
Defined in the proposal as "the natural or legal person that
has control over the provision of a benchmark". In practical
terms this means those responsible for the establishment, design,
production and dissemination of a Benchmark. Back
25
Defined in the proposal as "a natural or legal person contributing
input data". This is data used by the administrator to determine
the benchmark. Back
26
Newsletter of Pensions Europe, 4/2104: "IORPS could see their
use of benchmarks restricted" Back
27
Stg Co Deb, European Standing
Committee B, 28 November 2013 cols. 3-10. Back
28
Fifteenth Report, HC 219-xv (2014-15), chapter 8 (22 October 2014). Back
| 
